House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Key Concepts

Overview

This chapter explains some of the key concepts used in the Foreign Investment Fund ( FIF) measures. The chapter includes an explanation of:

he measurement period for an interest in a FIF (the notional accounting period);

he acquisition and disposal of an interest in a FIF;

istributions made by a FIF;

he meaning of 'entitled to acquire';

he meaning of 'quoted price'; and

he operative provision.

Explanation

notional accounting period of a FIF

The FIF measures will apply by reference to an accounting period of the FIF called the notional accounting period. The notional accounting period provides a measurement point for the application of the FIF provisions. Reference to a notional accounting period will be made for a variety of purposes including the application of the various methods of taxation and for some of the exemptions.

The notional accounting period of the FIF will generally coincide with the taxpayer's year of income. [Subsection 486(2)]

For a company or trust that was incorporated, established or brought into existence before 1 January 1993 the first notional accounting period of a FIF commences on 1 January 1993. The first notional accounting period of a FIF, which comes into existence on or after 1 January 1993, commences on the day on which it came into existence. [Subsection 486(7)]

If the period for which the FIF prepares its accounts is different to the taxpayer's year of income and this period does not exceed 12 months, then the taxpayer may elect for the notional accounting period of the FIF to coincide with the period for which the accounts of the FIF are prepared. [Subsection 486(3)]

If the taxpayer chooses to align the notional accounting period of the FIF with the period for which the accounts of the FIF are prepared, the election will continue to be in force so long as the taxpayer has an interest in the FIF. [Subsection 486(4)]

When the taxpayer elects to use the period for which the accounts of the FIF are prepared, the first accounting period that begins during the year of income in which the election is made, is a notional accounting period. This is referred to in the explanations in the following two paragraphs as the 'first period'. [Paragraph 486(5)(a)]

The period that is from the beginning of the year of income in which the taxpayer elects to change the FIF's notional accounting period to the beginning of the first period is a notional accounting period. [Paragraph 486(5)(b)]

Example 1

Assume that the period for which a FIF prepares its accounts is 1 January to 31 December each year.

On 1 August 1993 the taxpayer elects to change the notional accounting period of the FIF from his/her year of income to 1 January to 31 December.

The notional accounting periods of the FIF are:

1)

January 1993 - 30 June 1993;

2)

July 1993 - 31 December 1993; and

3)

January 1994 - 31 December 1994 and every year following.

The acquisition and disposal of an interest in a FIF

Effect of change in ownership

If there is a change in ownership of an interest in a FIF, this change constitutes a disposal by the person who had the interest in the FIF immediately before the change and an acquisition by the person who owns it immediately after the change. A change in ownership is treated as having occurred only if there is a change in the beneficial ownership of the interest in the FIF in addition to a change in its legal ownership. [Subsections 488(2) and (3) ]

The circumstances in which a change in the ownership of an interest in a FIF can take place include:

xecution of an instrument;

ntering into a transaction; and

ransfer by the operation of law.

[Subsection 488(4)]

In addition, a change in ownership will be taken to have occurred by:

declaration of trust in relation to the interest in the FIF under which the beneficiary is absolutely entitled to the interest rather than the trustee;

he release, discharge, satisfaction, surrender, forfeiture, expiry, abandonment or extinction, at law or in equity, of the interest in the FIF; or

he redemption or buy-back, in whole or in part, or the cancellation, of the interest. [Subsection 488(5)]

An issue to a person of an interest in a FIF is an acquisition of the interest by that person. [Subsection 488(6)]

There is no acquisition or disposal of an interest in a FIF if a right is exercised for which no consideration is paid or payable or if there has been an exchange of an interest in a FIF for another interest in that FIF of the same value. [Subsection 488(7)]

Time of disposal or acquisition

If an interest in a FIF was acquired or disposed of under a contract, the time of making the contract is the time of acquisition or disposal. If there is no contract, the acquisition or disposal takes place when the change in ownership occurs. [Section 489]

Consideration for the acquisition or disposal of a FIF

Where the acquisition or disposal of an interest in a FIF is for no consideration or for inadequate consideration, the taxpayer is required to treat the market value as the consideration. Acquisitions and disposals are treated as being for inadequate consideration where:

o consideration is given or received; or

oth of the following conditions apply;

he amount given or received was greater or less than the market value of the interest; and

he acquisition or disposal was not at arm's length.

When the acquisition or disposal of an interest in a FIF was for inadequate consideration an amount equal to the market value of the interest at the time of the acquisition or disposal is used as the consideration. [Section 490]

Example 2

An interest in a FIF with a market value of $41,000 is gifted by a mother to her daughter. The daughter would be required to use $41,000 as the market value of her FIF interest.

Distributions by a FIF

A distribution made by a FIF to a person who has an interest in a FIF is any amount paid or credited, or any property distributed by the FIF to the person that constitutes income derived, or a receipt of capital by the person. A distribution by a FIF includes the issue by a FIF to a person of a further interest in the FIF in consideration of the person's entitlement to a payment by the FIF. [Section 474]

Meaning of 'entitled to acquire'

A person is taken to be 'entitled to acquire' anything that the person is absolutely or contingently entitled to acquire. The entitlement to acquire can arise from any constituent document of a company, the exercise of any right or option or for any other reason. [Section 475]

Meaning of 'quoted price'

An interest in a FIF is sometimes valued by reference to the quoted price of the interest in the FIF. The quoted price is that price, for the class of interests in which the FIF interest is included, which is quoted on a particular day on a stock market. [Subsection 476(1)]

When there is more than one transaction on a stock market on the particular day on which the value of the FIF interests is required, the quoted price is the last published price for which such an interest was traded. If, on the particular day, there was no published price or there were no transactions on the stock market for interests in that class, the quoted price is the last price at which an offer was made on that day to buy such an interest. [Subsection 476(2)]

The Operative Provision - section 529

The operative provision provides for the foreign investment fund income to be included in the taxpayer's assessable income for the taxpayer's year of income in which the notional accounting period of the FIF ends. [Section 529]

The operative provision also apportions the amount of foreign investment fund income that is included in the taxpayer's assessable income according to the number of days throughout the year that the taxpayer is a resident of Australia. [Paragraph 529(2)(b)]